As Modi Govt Revises Borrowing Plan, Yields on 5-Year Bonds Move Upwards

Business Standard As Modi govt revises borrowing plan, yields on 5-year bonds move upwards

Bond dealers not very alarmed as this brings to an end the uncertainty on state and government GST compensation drama for now.

The yields on the five-year bonds jumped in their opening trades, but the benchmark 10-year remained relatively calmer after the government announced extra borrowing of Rs 1.1 trillion, to be equally raised in five- and three-year tenures, to compensate states on good and services tax (GST) shortfall.

Bond dealers didn’t seem very perturbed with the extra borrowing, but said the initial reaction on the five- and three-year bonds would be adverse because they also declined by about 25-30 basis points after the policy on October 9.

The yields on the 10-year bond opened at 5.922 per cent from its previous close of 5.898 per cent, the 5-year bond rose to 5.2550 from its previous close of 5.161 per cent. At 10.05 am, there was no trade in the three-year bonds, after its close of 4.718 per cent on Thursday.

“The incremental borrowing, while it will put pressure on the market, is in a way a positive. It will put an end to the Centre-State GST shortfall controversy, at least for the time being. It does away with the incremental state borrowing on this count,” said Joydeep Sen, fixed income consultant at Philip Capital.

Besides, the government is raising money for the shortfall in GST cess and not for its other expenditure, and hence the deficit is being maintained for now, bond dealers say.

Following the government’s announcement, the Reserve Bank of India (RBI) came up with a revised issuance calendar where it said that the amount will be raised at Rs 55,000 each in three years and five years’ securities